CFO Insights 2021 July

Japan Economic Outlook -Better performance in the second half-

CFO Insights is a monthly publication to deliver an easily digestible and regular stream of perspectives on the challenges confronting CFOs. In this article, we share the latest Japanese economic outlook published on Deloitte Insights on June 24th.

In light of rising infection cases, policymakers implemented a third state of emergency for Japan’s largest prefectures at the end of April, which has dampened our outlook for the country’s economic growth in 2021. As of writing this, the current state of emergency is expected to last until June 20 to ensure the spread of infection is controlled as the pace of vaccinations ramps up.1 Nonetheless, despite the fresh waves of COVID-19 and the consequent restrictions imposed by authorities, we still expect real GDP in Japan to grow modestly from Q1 to Q2 2021. Much of this optimism is due to a base effect. Real GDP contracted at a 3.9% annualized pace in Q1 as rising COVID-19 infections and the second state of emergency discouraged economic activity.2 As a result, consumer spending dropped, particularly for services. Capital formation and government spending, too, witnessed a similar decline.

With retail sales falling from March to April, consumer spending had a rough start to Q2. And survey data for May, when infection rates peaked, were mostly negative. As a result, consumer confidence was jolted again, and the Purchasing Managers’ Index (PMI) for the services sector pointed to a further contraction in May.3 However, the average of these indices for the first two months of Q2 remained above the Q1 average. Similarly, high-frequency mobility data near retail establishments picked up in Q3 through June 5 (figure 1).4 In addition, the Reuters Tankan Sentiment Index for the services sector was one of the few indicators that posted an improvement in May.5

This article was originally published on Deloitte Insights on June 24 , 2021. Reproduced with permission.

Explore the Economic collection on Deloitte Insights

Regardless of the fate of consumer spending in Q2, we can expect much stronger growth in the second half of 2021. Japan’s vaccine rollout—although slow relative to the United States’ and much of Europe’s—has gained speed recently. As of June 8, the rate of daily vaccinations in Japan was running at nearly twice the pace seen in the United States, and more than 11% of the population had received at least one dose.6 The combination of more vaccinations, the ending of the state of emergency, and pent-up demand is likely to encourage far more spending than what was seen in the first half of this year.

At the current pace of vaccination, at least one-third of the population should have received one dose by July 23, the start date for the Tokyo Olympics. Although overseas visitors are barred from attending and the event remains unpopular domestically,7 it could still encourage greater travel and spending than otherwise would have occurred without a major sporting event. Meanwhile, professional sports leagues in Japan have been allowed to play to live audiences throughout much of the pandemic, albeit with capacity restraints and other restrictions. The evidence emerging from these events may provide helpful insights for the organizers of the Olympics, as very few cases of infection were detected throughout the season.8 However, there are still lingering questions over whether the Olympics will be held at all, but assuming it goes forward and Japanese residents decide to attend, spending on consumer services could rebound strongly in July and August.

Longer-term challenges for consumption

In the longer run, Japanese consumers face several headwinds. Although wages have rebounded this year, they have merely returned to levels consistent with pay in 2019.9 Reports on this year’s “shunto,” the annual wage negotiations for unionized workers, show that wages have grown just 1.8%, the lowest rate in 12 years.10 A rise in the unemployment rate to 2.8% in April from 2.6% in March will do little to put upward pressure on wages.11 Disposable income has essentially been flat since the end of 2018, apart from a temporary surge last summer when fiscal stimulus boosted household balance sheets.12

Aggregate income and spending in Japan have been further restrained by demographics. Both the total population and the working age population are falling at a faster pace than they were just a year ago. The population of 15- to 64-year-olds fell by 590,000 in April from a year earlier.13 The demographic challenge in Japan is well known, but the pandemic has complicated the issue. The number of foreign-born workers in Japan increased by just 65,500 in 2020, hardly enough to make up for the aging population. Although the number of foreign-born workers increased by 191,700 on average during the previous three years,14 it is still not enough to make up for even half the decline in the working age population (figure 2). Rising labor force participation can help fill in some of the gap, but stronger immigration is necessary to keep the labor force growing.

However, attracting migrant workers after the pandemic may prove to be more challenging. Japan prevented nonresident foreigners from entering the country when it announced its second state of emergency at the beginning of this year. The border closure pushed some would-be migrant workers to other countries, such as Taiwan. Vietnam, Japan’s largest source of foreign workers, and some companies that send Vietnamese workers abroad are suspending their operations with Japan.15 To complicate matters, some of the Japanese industries that typically employ large shares of migrant workers have been among the hardest hit by the pandemic and the slowest to recover.16

A lack of available jobs in those industries may further discourage foreign workers from choosing Japan, which will only exacerbate the challenge of a declining population. One potential silver lining is that the shortage of foreign workers may encourage more investment in labor-saving technology, which would lift productivity growth.

Manufacturers remain resilient

The strongest part of Japan’s economy has been the manufacturing sector, with nearly all indicators pointing to stronger growth ahead. The manufacturing PMI has stayed above 50 since February,17 indicating that the sector is expanding. Manufacturing production in April was the highest it has been since September 2019, and Japan’s Ministry of Economy Trade and Industry has forecasted strong production growth in June after a modest dip in May. Relatively low inventory to sales ratios are also expected to support manufacturing production, moving forward.18

Both domestic and international demand for goods has been notably strong while the pandemic restrained spending on services. On the domestic front, household consumption of goods was 0.6% higher in Q1 2019 compared to Q4 2019. Meanwhile, services consumption was down 8.7% over the same period. Real investment in equipment and machinery rebounded 9.8% between Q3 2020 and Q1 2021, though it remains firmly below the prepandemic levels.19 Stronger investment has contributed to the production of capital goods (excluding transportation) to reach its highest level since September 2019.20 Housing starts too have picked up again, fueling a nascent recovery in the production of construction-related goods.

Global demand for Japanese manufactures is also looking strong, with goods exports in April up 7.9% from December 2019.21 Exports of semiconductor machinery continue to rise, reaching a record high in April that was up a staggering 93% from a year ago.22 Only a small portion of this growth is from a base effect as semiconductor machinery exports held up reasonably well in April 2020. The global shortage of semiconductors is driving demand for the machinery and equipment needed to produce them. China has been the largest buyer of this equipment, accounting for more than 40% of Japan’s semiconductor machinery exports in April.23 China has been keen to raise its capacity for semiconductor production since the United States sanctioned its largest chipmaker and implemented export controls to restrain China’s efforts to reach the technological frontier of chipmaking.24 The downside to the chip shortage is that automakers have struggled to keep up with demand. As a result, exports of motor vehicles in Japan were 6.7% lower than two years ago, accounting for a loss of 72 billion yen. However, the gain in semiconductor machinery continues to more than make up for any export loss in autos.25

High commodity prices lowered the goods trade surplus to just 65 billion yen in April, down from 747 billion yen in December.26 Import prices were up 25.4% year over year (YoY) in May, while export prices were up just 11.0% over the same period.27 Although a weaker yen, which lost about 5% of its value against the dollar this year,28 will make exports more competitive, it will also make many imported commodities more expensive as they are priced in dollars. Moving forward, the trade balance should remain in surplus as import prices stabilize and external demand continues to accelerate with the reopening of the world’s largest economies.

Despite higher commodity prices and worries of inflationary pressures in other parts of the world, inflation in Japan is virtually nonexistent. Core inflation, which excludes fresh food, has not posted a YoY gain since March 2020.29 Some of the weakness is due to political pressure that created a one-off decline in mobile phone charges, which fell 26.5% from a year earlier.30 At the same time, other components have witnessed temporary surges, which are also unlikely to endure. Services related to education jumped 0.8% from a year ago, now that the base effects of the free preschool education policy are behind us. In addition, hotel charges, package tours, and airline fares were all stronger on a year-ago basis as the economy temporarily reopened for most of April.31 The stark difference in inflation rates between Japan and other developed economies could put additional downward pressure on the yen, which in turn could aid inflation through the import channel.

Any additional inflationary pressure would help the Bank of Japan (BoJ) move closer to achieving its 2% inflation target. The BoJ is unlikely to provide substantially more monetary stimulus as it is reducing its purchases of assets after its policy review last March.32 The BoJ’s yield curve control policy allows it to target interest rates rather than a fixed amount of asset purchases each month. Substantial fiscal stimulus may also help lift inflation once pandemic-related restrictions are eased. At 15.9% of GDP, Japan’s direct fiscal stimulus was the sixth highest among advanced economies. Although that is far behind the United States’ 25.5%, it is still more than twice the amount seen in France and Spain.33

As Japan moves into the second half of the year, the economic recovery should accelerate further. The reopening of the economy, a potential boost due to the Olympics, and ample foreign demand will support stronger spending. However, after the initial surge of pent-up demand, weak wage growth, a declining population, and scarce migrant workers will likely put Japan back on the slow-growth trajectory it had faced before the pandemic struck.


  1. Anthony Kuhn, “Japan just extended its 3rd state of emergency weeks before the Olympics begin ,” NPR, May 28, 2021.
  2. Trading Economics, “Japan GDP growth annualized ,” accessed June 21, 2021.
  3. Japan Consumer Confidence , Japan Services PMI , Trading Economics.
  4. Our World in Data, “COVID-19: Google mobility trends ,” accessed June 21, 2021.
  5. Daniel Leussink, “Japan manufacturers’ mood rises to highest since late 2018—Reuters Tankan ,” Reuters, May 20, 2021.
  6. Our World in Data, “Share of people who received at least one dose of COVID-19 vaccine ,” February 17, 2021.
  7. Asahi Shimbun , “Survey: 83% against holding Tokyo Olympics this summer ,” May 17, 2021.
  8. Dan Orlowitz, “Japanese fans have attended sporting events since July. Will they be safe at the Olympics? ,” Japan Times , March 21, 2021.
  9. Cabinet Office, “Monthly economic report ,” accessed June 21, 2021.
  10., “Major Japan firms post smallest pay hike in 12 years ,” May 28, 2021.
  11. Trading Economics, “Japan unemployment rate ,” accessed June 21, 2021.
  12. Statistics Bureau of Japan, “Summary of the latest month on family income and expenditure survey ,” June 4, 2021.
  13. Statistics Bureau of Japan, “Monthly report ,” accessed June 21, 2021.
  14. Ministry of Health, Labor and Welfare via Haver Analytics.
  15. Nikkei Asia , “Vietnamese migrant workers fall sharply amid COVID-19 pandemic ,” May 31, 2021.
  16. Yuki Shibata, “Pandemic kills the dreams of foreign hotel staff for new life ,” Asahi Shimbun , August 11, 2020.
  17. Trading Economics, “Japan manufacturing PMI ,” accessed June 21, 2021.
  18. Ministry of Economy, Trade and Industry, “Indices of industrial production ,” June 14, 2021.
  19. Cabinet Office, “Jan.–Mar. 2021 (the 2nd preliminary) ,” 2021.
  20. METI, “Indices of industrial production .”
  21. e-Stat Portal Site of Official Statistics of Japan, “Select survey year/month (trade indexes) ,” accessed June 21, 2021.
  22. e-Stat Portal Site of Official Statistics of Japan, “Select survey year/month (values by commodity, export) ,” accessed June 21, 2021.
  23. e-Stat Portal Site of Official Statistics of Japan, “Select survey year/month (country by commodity, export) ,” accessed June 21, 2021.
  24. Arjun Kharpal, “How Asia came to dominate chipmaking and what the U.S. wants to do about it ,” CNBC, April 11 2021.
  25. e-Stat Portal Site of Official Statistics of Japan, “Select survey year/month (values by commodity, export) .”
  26. e-Stat Portal Site of Official Statistics of Japan, “Select survey year/month (trade indexes) .”
  27. BoJ, “Statistics: List of releases of corporate goods price index (CGPI) ,” 2021.
  28. Federal Reserve Economic Data, “Japan/U.S. foreign exchange rate (DEXJPUS) ,” June 14, 2021.
  29. Trading Economics, “Japan core consumer prices ,” accessed June 21, 2021.
  30. Leika Kihara, “Japan’s consumer prices extend falls as cellphone fee cuts offset input costs ,” Reuters, May 21, 2021
  31. e-Stat Portal Site of Official Statistics of Japan, “Select survey year/month (monthly report) ,” accessed June 21, 2021.
  32. Hideyuki Sano and Takahiko Wada, “Update 2-After policy review, BOJ says it will buy fewer JGBs next month ,” Reuters, March 31, 2021.
  33. International Monetary Fund, “Fiscal monitor database of country fiscal measures in response to the COVID-19 pandemic ,” April 2021.

About the author

Michael Wolf is a global economist at Deloitte Touche Tohmatsu Ltd. He provides written commentary and analysis on global economic issues that affect the firm and its clients. He has been quoted by various media outlets, including the Wall Street Journal and NPR. Wolf began his career as an economist at the US Labor Department and has since held economist positions at Moody’s Analytics, Wells Fargo Securities, and PwC. He has two graduate degrees, one in economic policy from Columbia University, and the other in statistics from Baruch College. He also has a bachelor’s degree in economics from the University of Maryland.

Should you have any inquiries on this article, please contact Michael Wolf (

Did you find this useful?